What Is Cryptocurrency?
With all the talk surrounding cryptocurrency, many are left to wonder, “What is crypto anyway?” In this guide, we will go over what crypto is and you can invest in it.
Originally published on Zinvest: zvstus.com/blog/what-is-cryptocurrency
Cryptocurrency is more relevant than ever. The price of a single Bitcoin — the first cryptocurrency — currently sits a little under $50,000 (debuting for under $0 a mere 11 years ago).
Companies like MicroStrategy and Tesla have both directly invested over $1 billion into Bitcoin. Meanwhile, crypto has become a widely accepted payment method for a number of goods and services, with stores such as Microsoft and Whole Foods accepting BTC.
In the midst of this boom, many are left asking, “What is cryptocurrency anyway?”
Cryptocurrency: The “Simple” Definition
Put most simply, cryptocurrency is a decentralized digital currency that utilizes blockchain technology to prevent counterfeiting or double-spending.
If you read that and feel even more confused than you were initially, don’t worry: we will break down the individual components of this definition.
What Is Decentralized Currency?
One of the most revolutionary aspects of cryptocurrency is its decentralized nature.
Decentralized currency is a method of wealth transfer that eliminates the need for a middleman (i.e. a bank or government) to verify transactions.
There are many benefits to this practice, five of which are listed below.
- Decentralized currencies protect users from problems commonly associated with central banks, including bank failures/collapses, exorbitant fees, and fraud.
- No limits on international transfers.
- Immunity to inflation/deflation.
- Universal pricing. For example, the price of one Ethereum is the same no matter where you are in the world. As a result, goods/services bought with this cryptocurrency will not be subject to unfavorable foreign exchange rates.
- The only thing one must do to own decentralized currencies is to be able to obtain and use a wallet, making them especially advantageous to unbanked people.
- Note: in the context of crypto, a “wallet” refers to a software program, online platform, or hardware device that stores your coins.
You might now be wondering how all this is even possible; how have cryptocurrencies been able to escape the confines of traditional centralization?
The answer lies in a little technology called a blockchain.
The Role of Blockchain Technology in Cryptocurrency Transactions
Blockchain is a model of transaction execution that removes the need for third parties in financial transactions.
It is a type of distributed ledger technology that records cryptocurrency transactions and duplicates/distributes them across the large network of computers on the blockchain.
Blocks are stores of data that are comparable to pages in a ledger. Whenever a cryptocurrency transaction takes place on a blockchain, a record of it is added to each node on the chain.
- Note: while the definition of a “node” may vary, in the context of blockchain, it is generally thought of simply as a computer that is part of the blockchain network.
With each blockchain transaction is the recording of an immutable cryptographic signature, aka a hash. A hash is essentially a fingerprint of data and is the backbone of security in cryptocurrencies.
In hashing, if even a single block in a chain is changed — say by a hacker — it would be immediately clear that fraudulence has occurred. To quote the Bitcoin Whitepaper: “When a node finds a proof-of-work, it broadcasts the block to all nodes. Nodes accept the block only if all transactions in it are valid and not already spent.”
Therefore, if this hacker’s intent were to manipulate a blockchain system, they would have to alter all blocks in the chain.
So as transactions within popular crypto networks (i.e. the Bitcoin network) rapidly increase, so does the impossibility of hacking them. As a result, cryptocurrencies, particularly those that are heavily utilized, are generally considered to be very secure stores of value.
How to Buy Crypto
Now that you’ve got some familiarity with the technical side of crypto, you may be wondering how to get in on the action. Thankfully, it’s now easier than ever to buy and sell cryptocurrency.
First, you will need to choose from one of the many cryptocurrency exchanges. These exchanges not only give you the option to trade digital currencies but also act as “hosted” crypto wallets, allowing you to store your crypto assets similarly to how a bank stores your money. Coinbase is arguably the most popular crypto exchange, though Binance, Gemini, and Kraken are widely used as well.
Signing up for a cryptocurrency exchange is a nearly identical process to signing up for a brokerage. Once you’ve chosen the exchange you want to use, download its app and fill out the information necessary to create an account. This usually includes your name, address, a valid email address, and a photo of your identification card.
As soon as you’ve been approved, you can transfer funds to your account. Enter your bank account number or debit/credit card info and input the amount of money you’d like to transfer to your account. With funds in your account, you can now start trading cryptocurrencies!
- Note: Most exchanges charge small transaction fees (“commission fees”) to buy or sell cryptocurrencies.
A Note on “Meme Coins”
Most would agree that decentralized currency has an overall positive effect on the world. However, it does have its downsides.
Without a central authority, there is a general lack of regulation within the crypto market. In the U.S., for example, the Commodity Futures Trading Commission is lax in its overseeing of the crypto market. As a result, a number of cryptocurrency startups are currently operating under the guise of being “the next Bitcoin,” despite their coins offering no real use case.
Dogecoin is the quintessential meme coin.
Before being pumped by social media-based investment groups, it was considered useless, most crypto experts believing it could never even hit $0.01.
However, after its historic pump (fueled in part by Tesla CEO Elon Musk’s public affinity for the coin), it reached an all-time high of $0.70. Since then, many crypto creators have attempted to recreate the hype that surrounded Doge.
Investing in cryptocurrency carries risk in and of itself. Investing in meme coins should be considered high-risk, and while we do not intend to make anyone’s investment decisions for them, we do strongly recommend researching before buying crypto.
The sad truth is that more than 4,000 digital currencies currently exist, and they can’t all be the next Bitcoin. It is recommended that newcomers stick to investing in more established currencies (Bitcoin, Ethereum, Cardano, etc…)
Conclusion: Is Cryptocurrency Legitimate?
The development of decentralized currency has been nothing less than revolutionary; it has universal appeal in its elimination of third parties in finance.
Many experts believe that cryptocurrency is the future of money. And this prediction is justified by the ever-increasing prices of popular cryptos like Bitcoin and Ethereum. And now that crypto is being sold by most major brokerages, cryptocurrency investors are more common than ever.
However, with so many cryptocurrencies currently in existence, it is hard to know which you will actually benefit from investing in. (They obviously can’t all blow up like Bitcoin.) This is why, as with any investment, it is always important to research before investing.
If you would like to learn more about the technical aspects of cryptocurrency, Forbes has compiled a list of free courses that are excellent resources to begin your journey through the nuanced world of crypto.
